Philip Fisher’s “Fifteen Points to Look for in a Common Stock”

American stock investor Philip Arthur Fisher (September 8, 1907 – March 11, 2004) was best known as the author of the investment guide book Common Stocks and Uncommon Profits. The book has the reputation of staying in print since it was first published in 1958.

Among his best-known followers is Warren Buffett who on some occasions was reported to have said that “he is 85% (Benjamin) Graham and 15% (Philip) Fisher”.

Fisher’s famous “Fifteen Points to Look for in a Common Stock” from “Common Stocks and Uncommon Profits” are seen as a qualitative guide to finding well-managed companies with growth prospects. According to Philip Fisher, a company must qualify on most of the 15 points to be considered a worthwhile investment.

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years? A company aiming for a sustained period of spectacular growth needs to have products catering to large and expanding markets.

2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited? A company needs to continually develop new products to expand existing markets or to enter new ones. This is to help it maintain above-average growth over a period of decades, the reason being that all markets eventually mature.

3. How effective are the company’s research and development (R&D) efforts in relation to its size? R&D activity needs to be efficient and effective for a company to develop new products.

4. Does the company have an above-average sales organization? According to Philip Fisher, expert merchandising is essential in a competitive environment, the reason being that few products or services are so compelling that they will sell to their maximum potential.

5. Does the company have a worthwhile profit margin? Tremendous growth alone won’t do. The growth must also bring worthwhile profits to reward investors.

6. What is the company doing to maintain or improve profit margins? Philip Fisher put it this way: “It is not the profit margin of the past but those of the future that are basically important to the investor.” Higher inflation raises a company’s expenses and, coupled with competition, will compress profit margins. Eyes have to be on how a company’s strategy will reduce costs and improve profit margins over the long term.

7. Does the company have outstanding labor and personnel relations? According to Philip Fisher, happy employees are likely to be more productive. Hence a company with good labor relations tends to be more profitable than one with mediocre relations. There is no single way to measure the state of a company’s labor relations. Indications of good labor relations in a company: making efforst to settle employee grievances quickly; a company making above-average profits paying above-average wages to its employees; and attitude of top management toward employees.

8. Does the company have outstanding executive relations? A company must cultivate the right atmosphere. In companies where the founding family retains control, promotion of family members should not be at the expense of more able executives. Executive salaries should also be at least in line with industry norms. There needs to be a regular review of salaries and merited pay increases are given without the executives having to make the demand.

9. Does the company have depth to its management? Proper development of a deep pool of management talent is vital. Avoid companies where top management is unwilling to delegate crucial authority to lower-level managers.

10. How good are the company’s cost analysis and accounting controls? A company must closely track operational costs for it to be able to achieve outstanding results over the long term. Knowing precisely the cost analysis of a company is not easy but those that are exceptionally lacking are discernible and investors should steer clear of them.

11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition? The important clues vary widely among industries. Investor need to understand the success industry factors of a company and where it stands against its competitors.

12. Does the company have a short-range or long-range outlook in regard to profits? Investors need to adopt a long-range view and correspondingly should seek companies that take a long-range view on profits. A company with its eyes glued on meeting Wall Street’s quarterly earnings estimates may not go for beneficial long-term actions that dampen its short-term earnings. Management may even resort to making aggressive accounting assumptions so as to report acceptable quarterly profit figures.

13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth? Seek companies with sufficient cash or borrowing capacity to fund growth. Equity offerings dilute the interests of owners.

14. Does management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur? Management must be one that reports candidly all aspects of its business, whether good or bad.

15. Does the company have a management of unquestionable integrity? Avoid a company “if there is a serious question of the lack of a strong management sense of trusteeship for shareholders.”

Toys "R" Us is closing. But independent toy shops say they're doing fine, despite competition from mega-stores. Many parents want to support local business and take their kids to stores where they can play with a toy before they buy it.

[SEOUL] South Korea's Kospi stock index weakened on Monday as major auto shares like Hyundai Motor and Kia Motors marked losses after US regulators opened a probe to look into airbag failure in vehicles from those companies.

Buffettpedia

In the last few weeks, we have seen two high profile unicorns file for initial public offerings. The first out of the gate was Dropbox, a storage solution for a world where gigabyte files are the rule rather than the exception, with a filing on February 23. Following close after, on February 28, Spotify, positioning […]

My posts over the last two months have been heavy, dealing first with my data update from January 2018, and with the market and its volatility in the last few weeks. I felt like taking a break and talking about something lighter and more personal, and giving you an update on my teaching, writing and […]

Jerome Powell, the new Fed Chair, was on Capitol Hill on February 27, and his testimony was, for the most part, predictable and uncontroversial. He told Congress that he believed that the economy had strengthened over the course of the last year and that the Fed would continue on its path of "raising rates". Analysts […]

The last week has been a roller coaster ride, though more down than up, and investors have done what they always do during market crises. The fear factor rises, some investors sell and head for the safer pastures, some are paralyzed not knowing what to do, and some double down as contrarians, buying into the […]

In my first nine posts on my data update for 2018, I focused on the costs that companies face in raising equity and debt, and their investment, financing and dividend decisions. In assessing those decisions, though, I looked at their actions through the lens of value creation, arguing that investing in projects that earn less […]

If success for a farmer is measured by his or her harvest, success in a business, from an investors' standpoint, should be measured by its capacity to return cash flows for its owners. That is not belittling the intermediate steps needed to get there, since to be able to generate these cash flows, businesses have […]

In the United States, as in much of the rest of the world, and as has been true for most of the last century, the tax code has been tilted towards debt, rewarding firms that borrow money with tax savings, relative to those that use equity to fund their operations. While the original rationale for […]

I have spent the last few posts trying to estimate what firms need to generate as returns on investments, culminating in the cost of capital estimates in the last post. In this post, I will look at the other and perhaps more consequential part of the equation, by looking at what companies generate as profits […]

I have long described the cost of capital as the Swiss Army Knife of finance, since it shows up in so many places in finance, albeit in different forms. In corporate finance, it is not only the cost of raising funding for a business but also the hurdle rate to use in capital budgeting and […]

In my last post, I looked at the currency confusions that globalization has brought into financial analysis, and how to clean up for them. In this post, I discuss the other aspect of globalization that is forcing analysts to change long accepted practices in estimating equity risk premiums for companies. Taking what they have learned […]

Warren Buffett was interviewed on CNBC on February 26, 2018 from 6:00 a.m. – 9:00 a.m ET., primarily to discuss his annual Letter to Shareholders that was released on February 24. The highlights of this interview were: (1) Berkshire Hathaway’s net worth increased by $65.3 billion in 2017, partially as a result of a $29 […]

I was interviewed on BNN TV (Business News Network – Canada) on February 26, 2018 at 8:40 a.m. ET on Warren Buffett’s Letter To Shareholders. Highlights of my interview: (1) Warren Buffett has not made a major purchase recently because stocks are near all-time highs and he would have to pay a 25% premium over […]

Berkshire Hathaway released Warren Buffett’s 2017 Letter to Shareholders at 8:00 a.m. today. The highlights were: (1) Berkshire’s $65 billion gain in net worth or book value in 2017 resulted from a $36 billion gain from operations and a $29 billion gain from the cut in corporate income taxes in December. As a result, Berkshire’s […]

I am quoted in a Wall Street Journal article: “Playing With $100 Billion, Warren Buffett Is Giant Trader of U.S. Treasury Bills”. “He’s aware that [Berkshire’s cash] is not earning a high rate of return for shareholders,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business and a […]

I am quoted in this CNBC article: “Warren Buffett’s partner Charlie Munger reveals how much of an impact luck has on success”. Fellow Omaha-native Buffett has also touted the critical role luck has played in his life and told MBA students at the University of Maryland in 2013 that winning the “ovarian lottery” helped determine his success. “Warren Buffett […]

Berkshire Hathaway’s 2017 Annual Report to shareholders will be posted on the Internet on Saturday, February 24, 2018, at approximately 8:00 a.m. eastern time where it can be accessed at www.berkshirehathaway.com. The Annual Report will include Warren Buffett’s annual letter to shareholders as well as information about Berkshire’s financial position and results of operations. Concurrent […]

In an SEC 13F filing after the market closed today, Berkshire Hathaway (Warren Buffett) reported the following major changes to its common stock portfolio during the fourth quarter of 2017: Additions: (1) Apple – An additional $5.3 billion stake of 31.2 million shares (or additional 23.3% stake) resulting in a total position valued at $28 […]

I am quoted in the Washington Post: “There is a lot of concern in the rising yield in the 10-year Treasury note,” said David Kass, professor of finance at the University of Maryland. “As it approaches 3 percent, concerns about inflation and competition for stocks by fixed income securities are increasing.”